As inflation soars, the European Central Bank will withdraw from the pandemic quantitative easing program
The European Central Bank has decided to scale back its huge crisis stimulus plan, announcing that its 185 million euro pandemic response plan will end net purchases in March, but also promised to continue buying bonds for most of next year under a separate plan.
The central bank said on Thursday that its Pandemic Emergency Purchase Program (PEPP), which it launched last year, will reduce the rate of net purchases in the first quarter of next year, and then stop in March.
But the European Central Bank eased the impact by announcing the expansion of its old asset purchase program (APP) from the current 20 billion euros per month to 40 billion euros in the second quarter and 30 billion euros in the third quarter.
It stated that these purchases will continue at a rate of 20 billion euros per month after October, “as long as it is necessary to strengthen the easing effect of its policy interest rate”. These moves mean that it will continue to buy bonds, but at a much slower rate than the nearly 90 billion euros it operated monthly for most of 2021.
Carsten Brzeski, head of macro research at ING, called the decision “very cautious.”
The European Central Bank said in a press release on Thursday: “The Management Committee believes that economic recovery and progress in meeting its medium-term inflation target allow it to gradually slow down asset purchases in the next few quarters.” Its board of directors held a virtual meeting and said Decided to keep the deposit interest rate unchanged at minus 0.5%.
The European Central Bank has postponed some decisions — including whether to reduce the attractiveness of subsidized loans to banks from June next year — because it is uncertain how the recent surge in coronavirus infections and the spread of Omicron variants will affect growth and inflation.
It also preserves the possibility of restarting net purchases under PEPP when necessary to deal with any “negative shocks related to the pandemic”.
The reinvestment of maturing bonds that have been purchased under PEPP will be extended to at least the end of 2024, and “flexibly adjusted at any time according to time, asset class and jurisdiction” to favor Greek bonds, otherwise it will be blocked due to credit ratings Low and buy.
The European Central Bank also raised its inflation expectations for the next few years, which is expected to rise from 2.6% this year to 3.2% next year. But it continues to predict that price growth will be lower than its goal of reaching 1.8% in 2023 and staying at that level in 2024.
It stated on Thursday that “an inflation target of 2% in the medium term still requires monetary easing,” while stressing the need to “maintain flexibility and optionality in the implementation of monetary policy”.
Christine Lagarde, President of the European Central Bank, stated that the restrictions imposed in response to the surge in coronavirus infections “slowed down” the region’s economic growth in the last quarter of this year.
She added that this slowdown has delayed expectations for the euro zone economy to return to pre-pandemic levels for a few months until the first quarter of next year. The European Central Bank lowered its growth forecast for next year to 4.2%, but raised its growth forecast for 2023 to 2.9%.
Analysts generally expect the European Central Bank to stop expanding its emergency bond purchase program. It reflects the recent increase in the Eurozone inflation rate to the historical high of 4.9% in November, which is far higher than the central bank’s target of 2%.
However, this is in stark contrast to the Fed’s more radical shift, which said on Wednesday that it would accelerate its “reduction” or withdrawal of asset purchases, and hinted that it plans to raise interest rates next year.
On a busy day for central banks in advanced economies, the Bank of England also unexpectedly raised borrowing costs by 15 basis points to 0.25% on Thursday, while the Norges Bank raised interest rates by 25 basis points to 0.5% in the context of general expectations. At the same time. , The Swiss National Bank kept the main interest rate unchanged at minus 0.75%.
Capital Investment’s macro economist Andrew Cunningham said: “Although this is far from the’full scale reduction’ that the Fed is now stepping up to implement, it is still a substantial reduction in policy support.” “Pledged to subsequently reduce APP to only 20 billion yuan per month. EUR [by October] More hawkish than we and the market expected. “
Eurozone government bonds, which had fallen after the Bank of England raised interest rates earlier on Thursday, fell further after the announcement by the European Central Bank.
The yield on German 10-year government bonds climbed 0.04 percentage points to minus 0.33%. Italian 10-year borrowing costs rose 0.07 percentage points to 0.98%. The decision to reinvest PEPP towards the purchase of Greek bonds led to a mild sell-off of Greek government bonds, with only slightly higher yields. Bond yields rise when prices fall.
The euro-dollar exchange rate rose 0.4% to 1.134 US dollars, the highest point in a week.